· The euro plunged to a 28-month low against the dollar on Tuesday as investors priced in deeper negative interest rates for longer in the euro zone.
The common currency’s drop also came on the back of a strengthening dollar as the trade spat between Washington and Beijing intensified and traders turned to buying U.S. assets as safe-haven investments without hedging their dollar currency exposure, analysts said.
Money markets have increased to more than 80% the probability that the European Central Bank will cut its benchmark rate by 20 basis points when it meets next week.
The ECB benchmark rate now stands at minus 0.40% and it has all but promised a monetary policy stimulus package as economic growth falters. Monday’s PMI survey showed European manufacturing contracted for seven straight months.
The euro was last down by 0.3% at $1.0936. It fell to $1.0926 earlier, its lowest since mid-May 2017. A break below the key $1.1000 level last week had sparked heavier sell-offs.
Against an index of its six major rivals, the dollar rose to 99.37 on Tuesday, the highest since mid-May 2017, as investors became more gloomy about the global economy’s prospects amid the U.S.-China trade dispute.
Bloomberg News reported that Chinese and U.S. officials are struggling to agree a schedule for a round of trade negotiations that had been expected this month.
Overseas investors dived into buying U.S. Treasuries, considered the most liquid and safe investment in tumultuous times.
The 10-year Treasury bond yield fell 2.5 basis points to 1.48% on Tuesday, close to the low of $1.44% it reached last week that was last seen in mid-2016.
The flows have boosted the dollar, but investors’ decision to either buy Treasuries unhedged, or trim some of their currency hedges has intensified the gains in the greenback, said Richard Falkenhall, senior forex strategist at SEB.
· The euro could get some relief if the 5-Star Movement and the Democratic Party form a coalition government in Italy, analysts said. 5-Star members will vote on Tuesday on forming a coalition with PD.
“If the vote succeeds, the euro could gain somewhat,” MUFG analysts said in a note, adding that “Italian assets like bonds and stocks would likely rally somewhat further”.
Elsewhere, the pound fell to its lowest in nearly three years on Tuesday as British lawmakers prepared to vote on the first stage of their plan to block Prime Minister Boris Johnson from pursuing a no-deal Brexit.
Sterling was last down 0.4% at $1.2012 after falling to $1.1959, the lowest since October 2016, when it plunged to $1.1491 in a flash crash. Against the euro, sterling touched a two-week low of 91.47 pence.
· The yield on the benchmark 10-year Treasury note dove Tuesday to its lowest level since 2016 after a report on the U.S. manufacturing sector showed a contraction in August.
The Institute for Supply Management said U.S. manufacturing activity declined last month for the first time since early 2016.
The yield on the 10-year note fell to its lowest level since July 2016 at 1.441%, while the yield on the 30-year Treasury bond was also lower at 1.925%. Yields fall as bond prices rise.
“If there was any question whether or not the trade war was hurting manufacturing sentiment today’s release cleared that up with the insightful observation that ‘Comments from the panel reflect a notable decrease in business confidence,’” Ian Lyngen, head of rates research at BMO Capital Markets, wrote of the ISM number.
· A gauge of U.S. manufacturing from the Institute for Supply Management showed the sector contracted in August, its first decline since 2016.
The ISM U.S. manufacturing Purchasing Managers’ Index fell to 49.1% in August, the lowest reading in more than three years. Any reading below 50% signals a contraction.
The report raised fears of a recession and hit the stock market. The Dow Jones Industrial Average lost more than 300 points, extending losses following the morning release from ISM.
· U.S. President Donald Trump said on Tuesday that trade talks between the United States and China were going well, though he warned that he would be “tougher” in negotiations if discussions drag on until his second term. Trump said the two sides would meet for talks this month.
· President Donald Trump wanted to double tariff rates on Chinese goods last month after Beijing’s latest retaliation in a boiling trade war before settling on a smaller increase, three sources told CNBC.
The president was outraged after he learned Aug. 23 that China had formalized plans to slap duties on $75 billion in U.S. products in response to new tariffs from Washington on Sept. 1. His initial reaction, communicated to aides on a White House trade call held that day, was to suggest doubling existing tariffs, according to three people briefed on the matter.
Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer then enlisted multiple CEOs to call the president and warn him about the impact such a move would have on the stock market and the economy.
He settled on a 5% hike in tariff rates on about $550 billion in Chinese products, which he announced in an Aug. 23 tweet after the market close.
· U.K. lawmakers have taken another step toward wresting control of the Brexit process away from Prime Minister Boris Johnson and his government.
A majority of lawmakers, including opposition politicians and so-called “rebel” members of the ruling Conservative Party, voted 328 to 301 Tuesday to take control of parliamentary business from the government. This would in theory allow them to push through legislation that could block government efforts to withdraw the U.K. from the EU without a deal on October 31. Johnson said he would bring forward a motion for a new general election following the setback.
Another vote will now be held as early as Wednesday on the legislation, and, if passed, it would pressure the prime minister to request another extension to the U.K.’s departure date, to January 31, 2020.
· Oil prices fell on Tuesday, with U.S. crude futures down 3% after manufacturing data raised concerns about a weakening global economy, while the U.S.-China trade dispute continued to drag on investor sentiment.
U.S. West Texas Intermediate (WTI) crude futures fell $1.68, or 3.1%, to $53.42 a barrel by 12:45 p.m. EDT. The session low was $52.84 a barrel, the lowest since Aug. 9.
Brent crude futures lost 92 cents, or 1.6%, to $57.74 a barrel. It sank as low as $57.23 a barrel, also the weakest since Aug. 9.
Reference: CNBC, Reuters
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